In a series of ‘confused’ proposals that sprout like mushrooms after rain during a crisis, one comes straight from Brussels – a reduction in the VAT rate to revive cheaper consumption and combat the increasingly dangerous recession. The United Kingdom plans to cut VAT from 17.5% to 15%, while Germany and France resolutely refuse.
Many will say it is wise, as Germany, for instance, emerged from one of the past crises, that of the 1970s, the fastest and least painfully precisely because it did not stimulate general consumption but production. This time, however, the excuse is somewhat different – a lower VAT rate also means a thinner budget, greater borrowing needs, and there is no capital. What this would mean for the Croatian state budget is clear to everyone.
Consultant Željko Perić believes that the economy certainly needs help, but reducing VAT is a complicated action that could open too many holes. Perhaps it would be better to selectively reduce taxes for certain groups of products, especially if wages are frozen and layoffs occur, he says. What would certainly help the economy is the method of paying VAT to the state, so that companies pay VAT not according to invoices but according to collections, Perić suggests. The state itself is a significant generator of illiquidity. Healthcare pays only within 270 days or longer, so whoever delivered goods to someone in that chain passes on illiquidity through a domino effect. By relieving liquidity, the state would not receive less money, just at a different pace, and liquidity would certainly improve. However, whatever is decided, the worst time to make such moves is during a crisis; these should be made in peaceful times, with a cool head, and with precise calculations of the impact on all segments of society, Perić recommends.
Economist Guste Santini says that we cannot do much with VAT now because it is the dominant tax collected mainly from imported goods. In a year when the budget deficit is being closed (and it must be closed, as we no longer have a good enough credit rating for new borrowings), consumption must also be reduced – our consumption is, in fact, generated by borrowing, from imports, and not from our own production, which only deepens the deficit on the trade and balance of payments account, Santini is categorical. To ease the tax burden on the economy, he suggests increasing excise duties and VAT while reducing income tax and increasing the non-taxable portion. This way, labor becomes cheaper, and the poor will gain more purchasing power than by reducing VAT on consumption. Most importantly, Santini recommends restoring the protective interest rate so that the little capital we have is not drawn out of Croatia.
